Money & Business
Small Business Watch: Even Small Fry Might Want to Comply With This Law
Sarbanes-Oxley, the corporate oversight legislation passed in 2002, was meant to help keep public companies on the straight and narrow by requiring detailed reports about internal controls.
But private companies aren't off the hook either. The act does apply some whistle-blowing and document-destruction provisions to these firms, but nothing to the extent required of their public brethren. Yet many private firms are going the extra mile anyway. Take Spheris, a roughly $200 million, Franklin, Tenn.-based provider of medical transcription technology. Like many large, fast-growing private firms, it's attempting to comply with Sarbanes-Oxley even though by law it doesn't really have to. The company was formed in 2003--after Sarbanes-Oxley--and its investors told management to implement the law's guidelines, says Chief Administrative Officer Gregory Stevens.
Why take the time and money to go through it all? "We wanted flexibility in case the company eventually goes public or is acquired by a public company," says Stevens. Many private-equity or venture capital firms are pushing executives to get in gear. "While it's burdensome for the companies, we don't want to preclude any avenue or exit vehicle for ourselves," says Donald Hughes of Camden Partners Holdings in Baltimore.
A recent PricewaterhouseCoopers survey of CEOs of fast-growing private companies found that 27 percent are adopting Sarbanes-Oxley practices. Yet two thirds of the CEOs also say that compliance is a costly hassle. At Spheris, it costs about $100,000 a year in outside consulting fees to help the company meet the law's requirements. At one point, Stevens thought that number would be over $1 million, but that estimate shrank after a September decision by the Securities and Exchange Commission gave small public companies until the end of 2007 to comply with the law. Stevens estimates that as many as five employees spend at least half their time dealing with these new regulatory requirements, including a full-time director of SEC reporting.
If you are running a mom and pop hot-dog stand or hair salon, you don't have to worry about Sarbanes-Oxley. But Bill Travis, managing partner at McGladrey & Pullen, an accounting firm in Bloomington, Minn., advises that if you're running a "$50 million firm and you're looking to grow," you might want to begin compliance now by getting strong financial people in place, enlisting independent directors, and hiring an outside auditing firm. For any entrepreneur looking to cash out someday, that might be a small price to pay.
Keep It Simple to Succeed
When it comes to corporate cliches, fatigued phrases such as "mission critical" or "value added" are among the most annoying. But when it comes to annoying and dangerous, "outside the box" tops the list--at least in the opinion of author and consultant Douglas Rushkoff. In his new book, Get Back in the Box: Innovation From the Inside Out, Rushkoff writes that when companies try to think or act "outside the box" with new packaging, advertising, acquisitions, or even CEOs, that shift in focus often results in a loss of focus. Rushkoff recalls meeting with the CEO of a home-electronics chain who wanted him to help devise a bottoms-up marketing strategy. Less Saatchi & Saatchi, more craigslist. But Rushkoff quickly realized the company didn't need new marketing as much as it needed better-quality store-brand products. The company had previously outsourced all its design and manufacturing. To some, outsourcing may seem innovative, but in this case, it was cutting the company off from the in-house expertise that built the firm in the first place. "American companies are obsessed with window dressing ... afraid to look at whatever it is they really do and evaluate it from the inside out," Rushkoff writes. What advice would he give to small businesses? "Look at your company as an opportunity to do the thing you are really best at, rather than looking at it as something you are building to sell," he says. "And ask yourself what genuine human need out there are you uniquely qualified to answer. Then go out and hire people who are enthusiastic and passionate. Do that, and I don't think you can really go wrong."
This story appears in the January 30, 2006 print edition of U.S. News & World Report.
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